A recent report has highlighted the discrepancy between Street Earnings and Core Earnings for S&P 500 companies, with Street Earnings often overstating profits. However, there are also many companies where Street Earnings are lower than their Core Earnings. Street Earnings, also known as Zacks Earnings, are adjusted to remove non-recurring items using standardized sell-side assumptions. The report analyzed the frequency and magnitude of understated Street Earnings in the S&P 500 and identified five companies likely to beat earnings in the second quarter of 2024.
The report found that for 122 companies in the S&P 500, or 24%, Street Earnings were lower than Core Earnings in the trailing-twelve-months ended in the first quarter of 2024. This was a slight decrease from the previous period, where Street Earnings were understated for 125 companies. In the first quarter of 2024, 41 companies had Street Earnings that were understated by more than 10%, representing 8% of the total, slightly lower than the previous quarter.
The 122 companies with understated Street Earnings make up 30.2% of the market cap of the S&P 500 as of July 8, 2024, up slightly from the previous period. On average, when Street Earnings are lower than Core Earnings, they are understated by about 16%. This analysis was based on examining financial statements and footnotes from approximately 3,000 10-Ks and 10-Qs filed with the SEC for first quarter 2024 results.
The report also identified five S&P 500 companies that are likely to beat earnings in the second quarter of 2024 because their Street EPS estimates are currently understated. The authors note that historical errors in Street EPS estimates can lead to further inaccuracies in future projections as investors and analysts often anchor their expectations to past results. The authors, David Trainer, Kyle Guske II, and Hakan Salt, mentioned that they do not receive compensation to write about specific stocks, styles, or themes.
Overall, the analysis of Street Earnings versus Core Earnings for S&P 500 companies revealed a significant number of companies where Street Earnings were lower than Core Earnings. This highlights the importance of understanding the differences between various earnings metrics and the potential impact on investment decisions. The report also provided insights into potential opportunities for investors by identifying companies likely to outperform earnings estimates in the upcoming reporting period.
